A correction for an over-extended risk selloff naturally translated into a pullback for the safe haven greenback this past session. That said, the bounce in optimism did little to shake fear of a larger wave of deleveraging heading our way. As such, the natural correction proved anemic and does little to support fear / hopes of an immediate reversal. Heading into the final 24 hours of the trading week, we find the S&P 500 Index (my favored risk barometer given its amplified stimulus element) holding at three-month support; while the Dow Jones FXCM Dollar Index is still trading around 10,000. We have reached a point of reflection where we need a fundamental push to keep the deleveraging trend moving – otherwise, the delay at meaningful risk-based support will eventually shake out ambitious bear interest and spur a larger reversal.

Escalating fear across the capital markets is difficult at this point. We have seen numerous attempts to turn the passive, speculative build up in the recent past fail despite more potent fundamental leverage (QE3 withdrawal, the height of Greece’s debt crisis, etc). So, besides the fact that benchmark risk measures are treading greater heights, what leverages the risk of a true reversal now? Perhaps renewed rumblings in the US banking system. Back in early March, US equities managed to muscle their way to four years highs on news that most of the TARP banks received a clean bill of health following the Fed’s most recent stress test. In turn, many of the firms announced dividends and buybacks that clearly bolstered shareholder optimism. Yet, since that round of news, we have seen growth concerns curb performance while European connections raise uncertain. After the New York close on Thursday, another dynamic was added to the picture when JPMorgan (the leader on the distribution effort) announced $2 billion loss on trading synthetic positions meant to hedge. The concern is that this could be a problem that is intrinsic to the US banking system (true or not). What really sticks CEO Dimon’s warning that volatility was a growing risk.

For the dollar, volatility is a critical ingredient to a true trend. Volatility is typically inversely correlated to risk appetite (as confidence sinks, volatility surges). When sentiment breaks down to the point that risk aversion turns into an outright demand for liquidity, the greenback shines. Is this bank trading loss and warning enough to tip the scales in the last 24 hours? Not likely. A turn to fear will be a cumulative event.

Euro: Panic Over Greece and Spain Ease, Waiting for Another Shock

As expected, the euro’s sensitivity to the ongoing problems in Greece and Spain eased Thursday. There is no doubt that the ongoing tumult in securing a Greek government and the slow realization of losses for Spanish banks has more pain to impart upon the euro; but officials have bought a short period of reprieve in the meantime. The EFSF’s €5.2 billion aid payment (€1.0 billion seems to have been withheld) to Greece should cover costs for the rest of the month and the nationalization of Spain’s fourth largest bank, are excellent means of buying time while not solving the underlying issue - a common theme for the euro. Now we look for another shock to the system. Next week’s round of 1Q GDP readings could prove the right caliber of catalyst; but in the meantime, it is worth watch the EC’s updated growth forecasts due at 09:00 GMT.

Canadian Dollar Exposed Heading Into April Employment Numbers

There are a few notable highlights on Friday’s economic calendar, but Canada certainly tops the ballot for potential volatility. On deck, we have the April employment data. If we recall the previous month’s report, a forecast for a 10,500 increase was blown out of the water with an 82,300 jump. The market impact was a notable run for the Canadian dollar. The same potential for volatility exists, but there is an increased bias for a positive outcome form this series – meaning a strong reading would have less of an impact otherwise. That said, the Canadian dollar has stumbled in the anti-risk move (particularly against the US dollar). A sizable risk here could be a potent selling catalyst.

British Pound Rallies Through London Session on Risk, BoE Hold

There was certainly a consensus amongst the FX crowd that the Bank of England would hold its course on monetary policy (a 0.50 percent benchmark and 325 billion sterling bond purchase target). And yet, news that the central bank followed through would still encourage the sterling to rally. It is somewhat difficult to separate the currency’s performance from risk trends, but the intensity of the move spoke of something more. The drive reflected an unwinding of positions that were placed on the off-chance that the central bank would respond to the double dip recession with additional help. In the meantime, industrial production slowed as expected, consumer confidence tumbled and GDP estimates meandered.

Australian Dollar’s Post Employment Glow Fades Back into Risk

Early Thursday morning, the Australian dollar was leading a rebound in risk trends in the after-glow of a notable improvement in April employment statistics. The 15,500-positon rise in net payrolls was a boon, but the unexpected drop in the jobless rate to a 4.9 percent clip was what really caught the masses off guard. Yet, this does little to answer the currency’s top three concerns: rate outlook, risk trends and China. In reference to the last one, a round of Chinese inflation, sales, investment and production data stands out as a good catalyst.

Japanese Yen Posts Largest Drop in Three Weeks, Not a Trend Change

If you look at a chart of the yen crosses, the funding currency’s stumble Thursday doesn’t look particularly remarkable. That said, from a statistical perspective, its drop was the biggest in three weeks. That speaks to the consistency of the carry deleveraging recently. And, on that note, Finance Minister Azumi this morning declined a call for an explanation as to why the yen continues to advance despite the significant efforts of the Bank of Japan to devalue the currency. I think we can call who wins in a fight between risk appetite trends and policy officials.

Gold Stabilizes as Implied Volatility Eases, Curbs Liquidity Demand

A modest advance through Thursday’s close broke up a bear trend that began by breaking a multi-year, rising trendline. That said, the balance of power has clearly shifted and we are once again falling into Friday morning. The reprieve came as expected volatility levels eased back while the dollar held below its 16-month ceiling and S&P 500 above three month support. Yet, conditions are not particularly quiet.